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Is internal audit losing value?

[SINGAPORE] Internal audit - long considered a must-have function within an organisation - is losing its value, with over half of senior managers around the world saying they feel it doesn't add much to their companies.

And this has much to do with the business environment evolving faster than internal audit services have, causing the needs and expectations of businesses to move beyond what traditional internal audits offer.

These were some of the findings contained in PwC's report, "2014 state of the internal audit profession study", which covered 1,920 chief audit executives, audit committee chairmen, CEOs, CFOs and chief risk officers, among others, around the world.

One participant, a chief compliance officer with a Fortune 50 consumer products company, said: "I wonder if the audit committee has an appreciation for how the pendulum has swung for internal audit."

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Fifty-five per cent of senior managers surveyed by PwC said they do not believe internal audit adds significant value to their businesses, while nearly 30 per cent of board members said internal audit adds less than significant value.

PwC said this is due to two factors: the business environment becoming increasingly complex and risky; and internal audit lacking the resources to meet rising expectations.

An internal audit is meant to provide independent assurance that a company's risk management, governance and internal control processes are operating effectively, according to the Chartered Institute of Internal Auditors. Unlike external auditors, internal auditors look beyond financial risks and statements to consider wider issues such as the company's reputation, growth, impact on the environment and the way it treats its employees.

But the function, and expectations, of the role have also evolved. Nagesh Pinge, chief audit executive for Tata Motors, India, said the balance has shifted from internal audit being more about providing assurance and satisfying regulatory compliance requirements to about achieving greater business insights.

"Internal audit now has become more collaborative than before. There is no more 'You' and 'I' and finger-pointing. Internal audit takes up coaching responsibility for the business, driving performance improvement initiatives and closing internal control gaps," he said.

Those internal audit functions that rise to meet such growing expectations within their organisations are seen as adding great value to their companies.

PwC found that, when a company has broad expectations of internal audit - ie, they expect it to be a trusted adviser, rather than just an assurance provider - and the internal audit function has also invested in the right capabilities to deliver on these expectations, the performance of internal audit is typically rated much higher.

For example, 67 per cent of stakeholders surveyed said that the internal audit function adds significant value when it is seen as a trusted adviser, whereas just 33 per cent feel it adds significant value when it is seen as just an assurance provider.

Melvin Flowers, corporate vice-president of Internal Audit at Microsoft, USA, put it this way: "Internal audit needs to be able to be in the business conversation and show they understand the business objectives. Internal audit won't have a seat at the table if they don't understand the business and have credibility in the management's eyes.

"We used to hire the best accountants. Now, we need someone that is as good with communication and able to listen, in addition to having good technical knowledge. If internal audit thinks their job starts with the balance sheet, they are going to be wrong. Their job starts with the business objectives and where the company is going. If they focus on the business objectives, they will be aligned to the critical risks of the organisation," he added.